S&P hits 12-year low as U.S. stake in Citi stirs fear

By IBT Staff Reporter02/27/09 AT 4:48 PM

Stocks fell and the S&P 500 closed at a 12-year low on Friday, after the government said it will take a large stake in Citigroup's common shares, fanning fears it will increase its role in other major banks.

The decline closed out a grim month on Wall Street, with the Dow industrials hitting the lowest level since May 1997 as the blue-chip index fell for a sixth straight month.

Healthcare and drug companies, such as Merck & Co and Johnson & Johnson Inc , fell for a second day on Friday on worries that U.S. President Barack Obama's budget proposal will strangle profits as the administration tries to rein in healthcare costs.

Data showing the U.S. economy shrank at an annual rate of 6.2 percent last quarter also weighed on the market.

Citigroup shares tumbled 39 percent after the government said it will convert up to $25 billion in the bank's preferred shares to common stock in a move that could dilute existing shareholders' ownership by 74 percent. The S&P financial index sank 8.1 percent.

There are continued beliefs that Citibank is not the last bank that the government will take a large stake in, said William Lefkowitz, options strategist at brokerage firm vFinance Investments in New York.

Some people believe that if the government takes a 30 to 40 percent stake, which they did in Citibank, that would be considered some form of nationalization, he said.

General Electric , which operates a large financing unit, slid after it said it would slash its dividend by 68 percent to 10 cents a share in order to conserve cash. GE shares fell 6.5 percent to $8.51.

It's a sign that all of these firms with significant finance exposure are needing to do what they can to preserve capital, said Peter Jankovskis, director of research at OakBrook Investments LLC in Lisle, Illinois. In the short run that is something equity holders will have to get used to.

With Friday's decline, the S&P 500 marked its fifth down month out of six and the biggest drop since October.

Trading was heavy on the New York Stock Exchange, with about 2.25 billion shares changing hands, above last year's estimated daily average of 1.49 billion, while on Nasdaq, about 2.45 billion shares traded, above last year's daily average of 2.28 billion.

Declining stocks outnumbered advancing ones on the NYSE by 2 to 1 while decliners beat advancers on the Nasdaq by about 3 to 2.